'Google tax' emerges as Korea-US trade issue

By Lee Kyung-min

The so-called "Google tax" is emerging as one of the trickier trade issues between South Korea and the United States after Washington expressed opposition to the move to tax the global tech giant.

The key point is whether taxing internet media companies by having them set up servers here, an attempt considered as data localization regulation, is a violation of the KORUS FTA (free trade agreement)

In an answer to a recent email inquiry from The Korea Times, U.S. Ambassador to Korea Harry Harris made remarks seemingly at odds with the National Assembly's move to revise the law to tax Google on revenue from digital services.

U.S. Ambassador to Korea Harry Harris / Yonhap

"With proper security measures in place, cross-border data flows will unlock possibilities that were previously unimaginable," Harris said.

"Conversely, obstacles to these flows will lock us in and hurt us in the long run. That is why we have urged the Korean government to avoid data localization rules."

Harris made the same remarks at a public debate he participated in with the Legal Research Institute of Korea University and Open Net, at the Korea University School of Law, Nov. 28.

The U.S. ambassador's comments came after Rep. Byun Jae-il of the ruling Democratic Party of Korea, as well as lawmakers from the small conservative Bareun Mirae Party proposed a revision to require foreign IT giants generating revenue in Korea to set up servers here.

The revision seeks to establish legal grounds on the permanent establishment or fixed place of business which gives rise to income or value-added tax liabilities in a particular jurisdiction.

The revision reflects the clear limit of the current permanent establishment-based tax code in identifying the presence of the U.S. tech giant that practically exists in the virtual world.

Lawmakers and experts in Korea as well as those around the world have stressed the need to promptly revise the law to require global tech giants to pay taxes in countries where their services are used.

In violation of KORUS FTA?

Some experts dismissed the implied criticism raised by the U.S. that it the move is a violation of the KORUS FTA.

Ahn Jeong-sang, a policy adviser for the National Assembly Science ICT, Broadcasting and Communications Committee, said requiring Google to set up a server in Korea was not in violation of the bilateral treaty citing the disputable nature of the clause.

Article 5 of Chapter 12 in the KORUS FTA that deals with a local presence in cross-border trade in services states: "Neither party may require a service supplier of the other party to establish or maintain a representative office or any form of enterprise, or to be resident, in its territory as a condition for the cross-border supply of a service."

Ahn, a professor at Chung-Ang University, said a server is not considered a representative office, enterprise or resident, which are requirements defined by their physically presentable nature and therefore the request is not in breach of the bilateral agreement.

"Representative offices and residents are clearly presentable, unlike servers which do not have a physical presence. Requiring the server is not in violation of the article," he said.

Ahn added the global tech giant should be willing to assume greater social responsibility in the form of paying the due amount of tax corresponding to their lucrative business here.

"There must be tax where there is income. If global tech giants such as Google fail to uphold such a basic moral principle, it only proves that it is nothing but a profit-seeking, irresponsible, opportunistic entity blinded by short-term moneymaking."

Google's "condescending" attitude further backed by the U.S. Embassy is simply an "impoliteness" that lacks consideration and respect for Korea, Ahn added.

"What is it other than bullying Koreans into succumbing to the will of a large nation like the U.S. if it asks us to stop legislative and government efforts deemed in the interest of the county? Can the U.S. do the same with European nations or other big countries? I doubt it."

In 2016, Naver, Korea's largest search engine and portal site, paid 400 billion won ($353 million) in corporate tax, nearly 10 percent of its annual sales of 4 trillion won, whereas Google Korea paid only 5 percent of that figure or 20 billion won.

Many global tech heavyweights have long managed to pay only a fraction of their profits as taxes here, largely by routing them to lower-tax jurisdictions where their headquarters are based.

Meanwhile, a civic expert voiced caution on the legislative move, saying corporate autonomy could be undermined due to excessive regulation.

"It is a sensitive matter that concerns the overseas business of IT giants, possibly affecting Korean companies seeking to expand their presence overseas," said Pang Hyo-chang, IT committee head at the Citizens' Coalition for Economic Justice.

"The government and the legislature should consider the far-reaching consequences the revision will have."